Markets Are In Turmoil: Prepare for the Future and Skate To The Puck

Is now a good time to start planning your business exit?

If the number of phone calls and emails we have received in the last two weeks from business owners who said “I’m not going through another down cycle!” is any indication, then I think business owners are waking up to the answer – Yes, now is the time to prepare and in fact, it is never too early to start planning for your exit.

I received a call yesterday from an owner who said, “Chris, I’m losing the value in my investments, what do you think is happening to the value of my business? I need to know if my business is even marketable.”

Yes, every business owner should know the value of what is most likely the largest asset in their estate plan and if what they have built is even marketable.

Every owner will eventually leave their business, whether by force or by choice. And there are only two types of business owners in the world: those that plan to get out, and those that have to get out.

According to the Exit Planning Institute 50% of businesses will sell under duress.

Unfortunately, because of the current pandemic, we are seeing forced closures that will be permanent.

Choosing to exit your business at a time when we are seeing a high level of buyer activity which drives the level of premiums being paid, requires extensive planning in advance.

So, let’s talk cycles.

Last week we chatted about the three Big Cs that drive buyer activity in the merger & acquisition market: Cash, Credit, and Confidence. Let’s revisit where we are today:

Cash: In response to the economic disruption caused by the virus the Federal Reserve is doing another round of quantitative easing, printing up to 700 Billion USD (500 B to buy treasuries and 200 B to buy mortgage backed securities) to maintain liquidity in the financial system. Now that businesses are closed they are drawing on their lines of credit to keep afloat depleting bank reserves. This printing money will provide the liquidity needed in the banking system to allow companies to stay above water and roll over long-term debt. For M&A, cash is still available to get deals done.

Credit: The Feds have pushed the funds rate to zero. Low rates are not going to encourage people to go out and buy if they have just lost their jobs, but it may help prevent some layoffs. For M&A, a low cost of credit fuels investor’s ability to leverage their deals.

Now this brings me to…

CONFIDENCE – After the 2008 financial crisis we had cash, cost of capital was cheap, but we struggled with confidence for a long time. 

Investors despise uncertainty, as you can see in the stock market, and today we are in the midst of an economy-shattering crisis in confidence. But, let’s keep things in perspective. Comparing us to Italy is a bit of an apple – orange situation; recognize that Italy is a very small country in comparison to ours, Italy is the oldest demographic next to Japan and their culture is high personal contact. So keep the percentage death rate in perspective and keep in mind we are data light here in the U.S. as we have not done extensive testing.

The impact of this virus (I refuse to name it as I’m sure you are all sick of it – no pun intended!) on our economy is unknown and we can’t quantify it. We do know that this is a geopolitical event and we are not experiencing a systemic problem in our financial system like we did in 2008, so we expect confidence to rebound quickly.

We also know that as a nation we are quite agile. Move our cheese and we Americans will go find it. Our country has faced many challenges and with each challenge we always seem to come back stronger. We are uncovering holes in our healthcare, supply chains, etc. and we will figure it out. James Dyson – yes the vacuum guy – designed a new ventilator in 10 days! Innovation – check it out here.

All of our clients are in different stages in their exit plan. Those that were close to selling their business, deals are closing. Those that are in due diligence, the closings are delayed. Those owners who are just starting the process will be well positioned to capitalize on the market when confidence comes roaring back.

Big company merger and acquisition deals are done for a while. It is too much to swallow at this time, however, the small/middle market deal activity, which always dominates M&A, will accelerate with confidence.

For privately held business owners, our prediction here at Legacy Partners is that investors will continue to acquire small/middle market businesses in order to improve earnings, enter new markets rapidly, expand geographic reach, acquire technology and talent, etc. There’s far less risk in the middle market and the upside for an investor is big. Remember…where one person sees danger another sees opportunity.

So, if you are a privately held business owner who wants or needs to exit in the near term, be ready. Recognize that M&A is dynamic, the game is fast, so it’s best to not panic, be proactive, and skate to where the puck will be!

Keep reading:

An Exit Strategy is Good Business Strategy – Why You Need a Plan Today!

An exit plan aligns an owner’s business, financial, and personal goals and is a living document, so it is continuously revised as the business scales. It serves as a guide for the business owner as they prioritize critical decisions to scale the company. This ensures that as the company grows transferable value is increased and the business will attract investors when they go to market.

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Who Will Be My Buyer?

There are three types of third party business buyers – financial, strategic and individual – and each brings something different to the table. Which is right for you?

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